Tuesday, 20 March 2018

Reasons a Business Owner May Need a Business Valuation

In this fast changing economic climate,
knowing how much an asset is worth and how that value is determined is a pre
requisite for intelligent decision makingi.e. for choosing investments for a portfolio, in
order to decide the appropriate price to pay or receive in a takeover, for
litigation purposes etc. It is imperative for every business that it has an up-to-date business valuation on hand at all times.Business value keeps on
fluctuating so even if you have your business valued only a year ago, the value
probably won’t be the same today. Therefore, it is imperative to keep a close
tack of business value.

Business Valuation
is the method of determining the value or
worth of a business. It helps the business owners in making a road map about how
to adjust their short-term and long-term goals so as to create a practical
timeline for the potential sale of business and for other exit strategies. Valuation
of business is the method of determining the worth of a business by generally using
three valuation approaches Asset Approach, Market Approach and IncomeApproach.Business
valuation may also include analysis of company’s capital structure, management,
its’ future earningsetc.
Business can be valued using the following steps-Planning and Preparation,
Adjusting the financial statements, Choosing the business valuation method,
Applying the selected valuation method and Reaching the business value conclusion.Also Read:Book Value Vs Market Value

Following
are the reasons for a business owner to need a business valuation:-

1)An opportunity to sell -If you are planning to sell your business,
knowing how much your business is worth becomes a necessity. The process of
valuation should be started far before the business goes for sale on the open
market as it will give an opportunity to increase the company’s value to
achieve a higher selling price.

2)Knowing business value during mergers/acquisitions- It is of
great significance for a business owner to know the value of their business
when planning for merger or acquisition. If a major company is in a deal to
purchase your company, you should be able to communicate them the value of
business as a whole i.e. the enterprise value or theoretical takeover price.
For this purpose, there is a need for business appraisal (valuation) so as to
get the correct price of your business.

3)Litigation:-In any kind
of court case whether it is divorce or injury case, business owner wants to
prove the value of his business in court so that damages can be based on its
true value rather than on an inflated figure from lawyer’s estimate.

4)Tracking your
goals:-Every business has short-term and long-term goals. In order to
achieve these goals, it is very crucial to measure the progress of business.
Business valuation helps to measure your progress towards achieving your goals
and therefore provides a roadmap on how to achieve these goals.

5)Knowing the
true value of your business: - Business
value can be assessed by knowing the stock market value, total asset value and
company bank account balance. However, this does not provide the true picture
of a company. Business valuation helps to show company’s income and valuation
growth over the course of 5 years which helps the potential investors to build
confidence as investors like a company that has regular and consistent growth
as it ages.

6)Better
Knowledge of company’s asset:-It is important to have an accurate business
valuation assessment .Business Valuation provides specific numbers which
enables business owners to obtain proper insurance coverage.

7)Retirement
Planning:-Business owners take a lot of risk by investing a lot of their
net worth-in one asset i.e. their business. These same business owners expect
to fund their retirement with the proceeds from the sale of their business. It
is indispensable for business owners to know the value of their business so
that they may know that at the time of their retirement their goals are met.
Therefore, sooner you determine the value of your business, the better it is.

8)Strengthen your credibility:-Valuation helps to
build confidence from employees to lenders to future buyers. If business wants
to expand or attract investors, business valuation will help lenders and
investor to evaluate business.

9)Estate planning and taxes:-Business Valuation plays an important role in
Estate planning and taxes. It helps business owners to plan for the inevitable
taxes that are to come so that you can ensure your legacy lives on.

Conclusion

Business Valuation is imperative for every business as it
tells about the true worth of a business. Moreover, it helps business owners to
know the fair market value of a business so that business is sold at a
reasonable enterprise value or theoretical takeover price. From the investor’s
perspective, business valuation helps investors to build confidence in company
by looking at company’s regular income and consistent growth over the course of
5 years. Therefore, Business valuation is the key for a business to achieve its
short term and long term objectives.